Consider an insurance policy with $15,000 worth of coverage. If there is a 10% chance the owner of the policy will file a claim for the $15,000 (and a 90% chance they will not file a claim), a fair price for this policy is:
A)$1,000
B)$1,500
C)$13,000
D)$13,500

Question

Quizplus · Accepted Answer

The expected value of the policy (the amount the insurance company can expect to pay out on average) is:
(0.10 × $15,000) + (0.90 × $0) = $1,500
Therefore, a fair price for the policy would be $1,500. Option B is the only choice that matches this value.

Consider an Insurance Policy with $15,000 Worth of Coverage